The price of used cars has been falling steadily and steeply for much of the past year. Unfortunately for car buyers, that may be about to change.
Wholesale prices for used cars sold at auction have risen sharply in recent weeks, according to industry data. Higher retail prices on used car dealership lots will likely be close behind.
According to data from Manheim, the largest wholesale auto market, prices have risen by 4% in just the last two weeks, an unusual increase in such a short period of time. While many in the industry expected the drop in prices to not last, the sudden rise took many by surprise.
“We didn’t expect prices to go up so much,” said Chris Frey, senior manager of industry insights at Cox Automotive, which owns Manheim. “It made my eyes pop out.”
Dealers began to reduce their used car inventories as prices were falling late last year and into January. Much of the decline began late last year, when a larger supply of new cars became available for purchase.
Parts shortages, particularly computer chips, have caused automakers to cut production well below demand for new vehicles and push potential new car buyers, even car rental companies, into the used car market. This shortage of new car inventory helped drive new and used car prices to record levels early last year.
But parts supplies and computer chip inventory improved in the last half of 2022, and with that, used car prices started to drop. In January, used car prices dropped 11.6% year-on-year, according to the Consumer Price Index, the government’s main inflation reading – the biggest 12-month drop since the height of the Great Recession in early 2009.
The busy sales season for used cars is just a few months away – it’s linked to when potential buyers receive their tax refunds. Now dealers are scrambling to restock, which is driving up prices.
The strong job market, with employers unexpectedly adding more than 500,000 jobs in January, is also boosting used car demand.
“If you want to pinpoint one factor driving demand for cars, it’s jobs,” said Ivan Drury, director of insights at Edmunds. “If you have a job, you have a car.”
Part of the trouble in the coming months can be traced back to the early days of the pandemic three years ago. The disruptions in the new car market back then are about to be felt by the used car market today.
In March and April 2020, auto factories across the country were closed on a stay-at-home order and many dealerships were closed. Demand for cars also slumped amid record job losses and millions of additional workers shifted to working from home instead of commuting..
So the slump in car sales in 2020 meant few people were signing new vehicle leases for three years, contracts that would normally be coming to an end by now and in turn feed those vehicles into the used car supply. in the markets.
“The repercussions of the pandemic are coming completely,” Drury said. “O the offer is definitely not going to be there.” Disruptions to car markets in 2020 and early 2021 could affect used car prices for most of the year.
“We are entering a tight supply period for 3- and 4-year vehicles, which account for the majority of (used) car sales,” said Michael Manley, CEO of AutoNation (AN), the nation’s largest car dealership, in a conference call with investors on Friday. “And that will impact wholesale prices and ultimately retail prices.”
It’s hard to know how long the rise in used car prices will last.
The job market and consumer spending are strong at the moment, but there are still concerns about a possible recession. It seems likely that the Federal Reserve will continue to raise interest rates, at least in the short term, which in turn will increase the cost of borrowing for cars and the financing that dealerships use when buying their own inventory.
Falling used car prices have been a major factor in slowing inflation, but a sustained rise in used car prices could make it harder for the Fed to back off rate hikes.
Overall prices are up 6.4% over the past 12 months, according to the CPI, but that reading has fallen for seven straight months. And prices would have risen by 6.9% over the same 12-month period if used car prices had taken such a sharp drop and instead remained unchanged.
Therefore, the broader economic conditions in the US economy will certainly affect used car supply, demand and prices, making it very difficult to predict future prices, Frey said.
“I don’t think this latest increase is a blip. But I imagine prices could come down after spring and tax refunds,” Frey said. But he added that predictions are difficult to make in today’s market.
“We’ve been asking for a 4% drop in prices from December last year to December this year,” Frey said. “We may have to revise that.”